UK Fiscal Policy Themes - HOT TOPIC for Paper 2! Must Watch 🔥

Summary

This video discusses key themes in UK fiscal policy, focusing on the shift from heavy expansionary measures during the COVID-19 pandemic to current contractionary policies. It highlights the significant increase in government borrowing, high budget deficits, and national debt, leading to the need for tax rises and spending cuts. The video also touches on the impact of these policies on inflation, wage growth, and living standards, as well as the political implications of fiscal drag and the differing approaches in Scotland. The aim is to provide context and statistics for macroeconomic exam preparation.

Takeaways

• 📈 The UK has recently employed heavy contractionary fiscal policy to counter the effects of previous expansionary measures.
• 🏥 During the COVID-19 pandemic, the UK government implemented significant expansionary fiscal policies, leading to a budget deficit that peaked at 15% of GDP.
• 💷 The government's response to COVID included large-scale spending increases and tax cuts, particularly for industries severely impacted by the pandemic.
• 📉 Post-COVID, the UK has seen persistently high budget deficits, with the structural deficit sitting at around 2% of GDP.
• 💸 The national debt of the UK has risen from 80% to 100% of GDP, leading to increased government spending on debt interest.
• 💨 The 'mini budget' of September 2022 introduced by the Liz Truss government was highly expansionary and unfunded, causing a market panic and a sharp rise in government bond interest rates.
• 🌨 Under Prime Minister Rishi Sunak, the UK has shifted to contractionary fiscal policy, focusing on tax increases and spending cuts to reduce the budget deficit and national debt.
• 🏛️ Fiscal policy in the UK has been used to manage inflation and promote economic stability, with the government aiming to reduce the tax burden and create fiscal headroom for future needs.
• 🏴󠁧󠁢󠁳󠁣󠁴󠁿 Scotland has independent fiscal policy powers and has implemented even more aggressive tax increases than the rest of the UK, including higher income tax rates and the introduction of new tax brackets.
• 📉 The contractionary fiscal policies may have negative impacts on economic growth, living standards, and could potentially increase income inequality in the UK.

Q & A

What is the current fiscal policy stance in the UK?

The current fiscal policy stance in the UK is heavy contractionary, aimed at reducing high budget deficits and national debt levels.

How did the UK government respond fiscally during the COVID-19 pandemic?

During the COVID-19 pandemic, the UK government implemented heavy expansionary fiscal policy, which included massive increases in government spending, such as on health and the Furlough scheme, and significant tax cuts, particularly for industries hardest hit by the pandemic.

What was the impact of the UK government's fiscal policy during COVID-19 on the budget deficit and national debt?

The UK government's expansionary fiscal policy during COVID-19 led to a budget deficit of 15% of GDP, equivalent to over £300 billion in government borrowing in one fiscal year, and a national debt that jumped from 80% to around 100% of GDP.

What is the phenomenon of 'fiscal drag' and how is it being used in the UK's current fiscal policy?

Fiscal drag is when people are pushed into higher tax brackets due to inflation and wage increases without a corresponding adjustment in tax brackets. In the UK's current fiscal policy, income tax bands are being frozen, which will result in more workers being pushed into higher income tax brackets, effectively increasing tax revenue without explicitly raising tax rates.

What are the key tax increases that have been implemented as part of the UK's contractionary fiscal policy?

Key tax increases include rises in income tax through fiscal drag by freezing tax bands, an increase in the corporation tax rate from 19% to 25%, and the introduction of windfall taxes on energy firms.

How has the UK government attempted to offset the impact of tax increases?

The UK government has tried to offset some of the impacts of tax increases by cutting National Insurance rates from 12% to 10% and then to 8%, and by introducing capital allowances to encourage business investment.

What is the current situation with fiscal policy in Scotland compared to the rest of the UK?

Scotland has independent fiscal policy powers and has increased income tax rates even more than the rest of the UK, including introducing a new tax bracket and freezing other tax bands to promote fiscal drag.

What are the potential negative impacts of the UK's contractionary fiscal policy on growth and living standards?

The contractionary fiscal policy could harm actual and potential growth, reduce living standards due to increased taxes and cuts in public service spending, and potentially increase income inequality.

Why is the UK government pursuing contractionary fiscal policy despite the potential negative impacts?

The UK government is pursuing contractionary fiscal policy to restore confidence in government finances, improve credit ratings, reduce interest rates on government bonds, and create fiscal headroom for future crises or public service funding.

What was the fiscal situation like in the UK before the COVID-19 pandemic?

Before the COVID-19 pandemic, the UK's structural budget deficit was around 2% of GDP, and the national debt was at 80% of GDP, which was considered manageable compared to the post-pandemic situation.